Precious Metals

     

 

Which Disturbance in the Farce can be Profitably Ignored Today?

There has been some talk about submerging market turmoil recently and the term “contagion” has seen an unexpected revival in popularity – on Friday that is, which is an eternity ago. As we have pointed out previously, the action is no longer in line with the “synchronized global expansion” narrative, which means with respect to Wall Street that it is best ignored.

 

Misbehaving EM currencies – the Turkish lira has become quite unruly of late, which is bad juju for a country with a huge balance of payments deficit and an external debt-to-GDP ratio of well above 50%. Arguably the zaftige move in the Chinese yuan is the more important event though. If it breaches the red resistance line in the chart above, the yuan will be at a new 10-year low. Oh well, who cares? Not the US stock market if recent headlines are any indication.

 

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The Fundamental Price has Deteriorated, but…

Let us look at the only true picture of supply and demand in the gold and silver markets, i.e., the basis. After peaking at the end of April, our model of the fundamental price of gold came down to the level it reached last November. $1,300. Which is below the level it inhabited since Q2 2017.

We will look at an updated picture of the supply and demand picture. But first, here is the chart of the prices of gold and silver.

 

Gold and silver priced in USD

 

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The Goldminbi

In recent weeks gold apparently decided it would be a good time to masquerade as an emerging market currency and it started mirroring the Chinese yuan of all things. Since the latter is non-convertible this almost feels like an insult of sorts. As an aside to this, bitcoin seems to be frantically searching for a new position somewhere between the South African rand the Turkish lira. The bears are busy dancing on their graves.

 

Generally speaking bears have little to celebrate these days, but in some sectors they still do. If you want dancing bears with music, they have those on Youtube.

 

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FRN Muscle Flexing

Shh, don’t tell the dollar-paradigm folks that the dollar went up 0.2mg gold this week. Or if that hasn’t blown your mind, the dollar went up 0.01 grams of silver.

It’s less uncomfortable to say that gold went down $10, and silver fell $0.08. It doesn’t force anyone to confront their deeply-held beliefs about money. But it does have its own Medieval retrograde motion to explain.

 

Even the freaking leprechaun is now offering government scrip…  this really takes the cake. [PT]

 

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Aragorn’s Law or the Mysterious Absence of the Mad Rush

Last week the price of gold dropped $8, and that of silver 4 cents.  There is an interesting feature of our very marvel of a modern monetary system. We have written about this before. It sets up a conflict, between the perverse incentive it administers, and the desire to protect yourself in the long term.

 

Answer: usually when it is too late… [PT]

 

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Claudio Grass in Conversation with Todd “Bubba” Horwitz

Todd Horwitz is known as Bubba and is chief market strategist of  Bubba Trading.com. He is a regular contributor on Fox, CNBC, BNN, Kitco, and Bloomberg. He also hosts a daily podcast, ‘The Bubba Show.’ He is a 36-year member of the Chicago exchanges and was one of the original market makers in the SPX.

 

Todd “Bubba” Horwitz and Claudio Grass

 

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Introductory Remarks by PT

Dear readers, we are hereby beginning to publish material from a new author, Florian Grummes of Midas Touch Consulting. Some of you may already know Florian from his contributions to recent issues of the annual “In Gold We Trust” report by Incrementum. He is a well-known and highly respected market analyst (particularly of gold and cryptocurrency markets) in the German-speaking parts of the world and we hope we will be able to contribute a bit to making his extremely interesting work more widely known to an international audience.

 

Meet Florian Grummes, founder of Midas Touch Consulting.

 

The Midas Touch Gold Model is a proprietary model Florian developed, which as the name already indicates is designed to evaluate trends and potential trend changes in the gold market. Below follows the most recent update of the model. We are posting this update with a slight delay of two days, but that should not be an issue – if any major signal changes occur, they will be conveyed as soon as we are apprised of them. Without further ado, here is the report (as we are always wont to do, we have added a few charts and caption comments where appropriate):

 

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Quantity Theory Revisited

The price of gold fell another ten bucks and that of silver another 28 cents last week. Perspective: if you are waiting for the right moment to buy, the market is offering you a better deal than it did last week (literally, the market price of gold is at a 7.2% discount to the fundamental price vs. 4.6% last week). If you wanted to sell, this wasn’t a good week to wait. Which is your intention, and why?

 

Gold vs. TMS excl. memorandum items (the latter add several 100 billion dollars to the recent total, but currency & deposit money represent the bulk of TMS-2 – we chose this version because it allowed us to make a longer-term chart). It is obvious that there is no 1:1, instantaneous correlation between the quantity of money and prices – in this case, the gold price – far from it. However, no-one is saying that anyway, as far as we are aware. The purchasing power of money depends on four factors: the supply of and the demand for money, and the supply of and demand for goods and services. Nevertheless, it is undeniable that prices are not independent of the money supply. With respect to the gold price, the chart above simply shows that there are leads and lags between the quantity of outstanding dollars and the gold price – these can certainly be lengthy, but that is what the periods when the two drift apart represent. The gold price (and all other nominal prices in the economy for that matter) would not have experienced such a large long term increase if the money supply had remained stable. Most of the time, changes in the money supply growth are not very useful for forecasting short term trends in the gold price, but the size of the money stock and the price of gold do correlate over the long term. Mises described the effect of inflation (inflation = an increase in the money supply) on prices as follows:

The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent. This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services.” 

Elsewhere Mises remarks that economic productivity has often matched or even outpaced monetary inflation, and in those periods nominal price increases were occasionally suppressed altogether:

A sharp rise in commodity prices is not always an attending phenomenon of the boom. The increase of the quantity of fiduciary media certainly always has the potential effect of making prices rise. But it may happen that at the same time forces operating in the opposite direction are strong enough to keep the rise in prices within narrow limits or even to remove it entirely. […] As an actual historical event credit expansion was always embedded in an environment in which powerful factors were counteracting its tendency to raise prices. As a rule the resultant of the clash of opposite forces was a preponderance of those producing a rise in prices. But there were some exceptional instances too in which the upward movement of prices was only slight.” [emphasis added]

Gold is a monetary asset, i.e., the market-chosen money commodity. As such, it behaves like a currency and its long term correlation with USD money supply growth is actually quite pronounced. The supply of gold grows at a very slow pace, and as long as the market treats it like money, its price will tend to rise in the long term relative to currencies with a faster growing supply. In the short to medium term other macroeconomic factors are most of the time more important gold price drivers. It should be noted though that in today’s central bank-administered fiat money system, these other factors also tend to have a lead-lag relationship with money supply growth rates. After all, the latter are driven by central bank policy, which in turn is generally formulated in response to macroeconomic developments. [PT]

 

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Regulated to Death

The price of gold fell $13, and that of silver $0.23. Perspective: if you’re waiting for the right moment to buy, the market now offers you a better than it did last week. If you wanted to sell, this wasn’t a good week to wait. Which is your intention, and why?

 

We are rather late posting Keith’s supply & demand update this week, so we felt we might as well add an updated chart of the divergences we recently discussed. This week gold has dropped quite a bit further, but the bullish divergences between gold and gold equities have stubbornly persisted. Such market behavior is virtually always meaningful (at least we cannot remember the last time when it hasn’t been). [PT]

 

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Waving the White Flag

The price of gold rose two bucks last week, though the price of silver fell 10 cents. We have seen several analyses recently predicting big price drops, in one case by at least $500 in gold by the end of the year.

Is this what capitulation looks like? It’s said they don’t ring a bell at the top, but they don’t ring a bell at the bottom either.

 

The give-up moment arrives… [PT]

 

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A Beginning Shift in Gold Fundamentals

A previously outright bearish fundamental backdrop for gold has recently become slightly more favorable. Ironically, the arrival of this somewhat more favorable situation was greeted by a pullback in physical demand and a decline in the gold price, after both had defied bearish fundamentals for many months by remaining stubbornly firm.

 

The eternal popularity contest…

 

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Technical Divergence Successfully Maintained

In an update on gold and gold stocks in mid June, we pointed out that a number of interesting divergences had emerged which traditionally represent a heads-up indicating a trend change is close (see: Divergences Emerge for the details). We did so after a big down day in the gold price, which actually helped set up the bullish divergence; this may have felt counter-intuitive, but these set-ups always do. Consider now the updated chart below (we have added the HUI-gold ratio in the third panel of the chart, as it provides additional clarity).

 

Everybody has different reasons for wanting to buy or hold gold – this is actually a fairly good one… :)

 

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THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

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